05 March 2023

GBP

With both the Fed and ECB raising rates by another 25bps, markets believe that the BoE will replicate next week, raising UK rates to 4.5% in the process. That would be the twelfth straight meeting in which the BoE have raised rates. As with this week’s meetings, markets will focus on the BoE’s guidance for future UK rate moves, which is especially tricky, given the uncertain economic backdrop. In the case of the BoE, the voting pattern may also give some better signals, given that two of the nine committee members voted for a pause at last month’s meeting. Could there be more dissenters this time round?

Any BoE members voting for a pause will have to look beyond the fact that inflation still remains painfully high in the UK, with the latest reading of 10.1%, nearly double that of the current inflation rate in the US. There may be some better news on the horizon, with energy prices slipping ever-lower (see CAD), and food price inflation set to decline – according to a recent survey from British retailers. Indeed, in a recent survey conducted by Citibank and YouGov, overall public expectations for inflation a year from now have declined from 5.4% to 5.2% over the past month.

There was also some better news from the UK housing market of all places this week, with Nationwide House Prices increasing by 0.5% over the past month, in spite of those cumulative BoE rate hikes. Added to that was a decent surge among the latest PMI data, with both the Composite (up from 53.9 to 54.9) and Services (up from 54.9 to 55.9) beating estimates and remaining comfortably above the key 50 threshold, even if that has been achieved by raising prices along the way.

Aside from the BoE, the latest UK growth data is released a day later, with an expected GDP decline of 0.1% during the first quarter. GBP/USD has edged slightly higher over the week, driven mostly by the weakening USD. Indeed, GBP/USD is now back over 1.2600, a level not traded in almost a year. Having also risen back over 1.1350 last week, GBP/EUR has since consolidated gains.

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EUR

In an ‘almost unanimous’ decision, the ECB raised all Euro area interest rates by a reduced 25bps yesterday (Thursday), increasing their main refinancing rate (policy rate) to 3.75% in the process. The ECB decided to opt for a smaller hike this time round, given tepid growth in the region of late. Much the same as in the US, the rate hike had been fully priced in by markets. However, markets went into the meeting expecting a hawkish tone from ECB President Lagarde in her post-meeting conference, given persistent Euro area inflation.

On that note Lagarde delivered, proudly announcing that ‘it is very clear that the ECB are not pausing,’ which should help to keep the Euro bulls amongst us happy. Lagarde also mentioned that the region’s ‘inflation outlook has upside risks’. In data released this week, the latest regional inflation posted a slight improvement, with annual core inflation declining from 5.7 to 5.6%.

The single currency has so far failed to take advantage of the ECB’s hawkish tones, with EUR/USD steady near the 1.1050 region, having been able to penetrate beyond the recent yearly high approaching 1.1100, which was set a week ago.

Ahead of the ECB, there were some worrying signs from the latest German Retail Sales data, with sales declining by a surprising 2.4% throughout March, pushing the yearly figure down to a dismal -8.6%. It is abundantly clear that German consumers are speaking with their feet, as they react to the ongoing rate hikes in the region.

USD

This week’s Fed meeting did little to drive the prices of risk assets higher, quite the opposite actually. Markets had been expecting another 25bps rate hike (to a target range of 5 – 5.25%), with pre-meeting expectations well into the >90% region, which was as good as done deal in our book and the Fed duly delivered on that prediction. However, this meeting was always going to be about how much Jay Powell and the Fed had to say about future rate decisions, how explicit they might sound in regard to any immediate pause, and the cloudy outcome from Powell’s post-meeting comments left markets hanging.

On the one hand, the Fed removed the ‘significant’ line from their accompanying statement suggesting that ‘some additional policy firming may be appropriate.’ The ‘significant’ quote came directly from Powell during his post-match conflab. However, Powell still highlighted the Fed’s ongoing commitment to tackle frothy inflation and that the FOMC will be guided in their rate setting by events moving forward. Basically, future moves will continue to be data driven, and given that US inflation remains way ahead of the Fed’s 2% target, as well as an ongoing tight Labor market, the argument for further rate hikes still persists. This is all especially significant, given that markets still expect the Fed to start cutting rates before the end of the year.

Markets still think that a pause will be the outcome from next month’s Fed meeting, with a 100% probability at the time of writing. However, later today we get the April Nonfarm employment report, which could quickly change that prediction. The data leading into it has been somewhat mixed, with ADP (private payrolls) comfortably beating estimates, rising by an impressive 296K over the past month, having been expected to increase by a mere 148K. The JOLTS (job openings) data went the other way, with only 9.59M current vacancies, down from 9.97M and approaching a two-year low. Were the payrolls and next week’s inflation data to pop markedly higher, then we should expect markets start to disbelieve in their own expected May meeting outcome. On inflation, the latest CPI data is expected to highlight ongoing strength among the key core component. Round and round we go.

The dollar struggled in the immediate aftermath of the Fed meeting, which perhaps suggests that currency traders have sided with a pause scenario for now. The dollar index also remains above the key 100.00 region, but slipped from a weekly high of around 102.00, to well under 101.00 post-Fed. Having risen sharply to a one-month top above 137.70 on the back of the latest BoJ meeting, USD/JPY slipped back under 134.00, further highlighting broader dollar weakness.

CAD

It has been a particularly slow week for Canadian data, with the big news – in the shape of the latest employment report, not scheduled for release until after we publish later today (Friday). On that note, the latest estimates predict a slight increase in the overall unemployment rate from 5 to 5.1% over the past month, as well as some moderation among the latest Net Change in Employment, with gains decreasing from 34.7K to around 20K.

Despite the slow data week, the Loonie has been anything but dull, with the big declines among commodity prices being a constant drain on spirit among Loonie bulls since early April. Oil has dropped by a staggering 16.5% over the past three weeks, despite the recent production cuts announced by OPEC+. USD/CAD rose from 1.3300 to almost 1.3670 over the prior two weeks, but has been edging lower throughout this week and is now around 1.3510, suggesting the move now looks to be driven more by the broadly weakening greenback, given that oil prices have failed to reverse materially higher.  

Looking ahead, it is another light Canadian data agenda throughout next week, so expect the Loonie to be driven by the broad greenback moves for the most part.

AUD & NZD

The RBA shocked markets this week, raising Australian interest rates by 25bps to an 11-year high of 3.85%, having paused a month earlier. The RBA governor Philip Lowe suggested that the rebounding property market, and a tight Labour market were among the reasons for the shock hike this week. Lowe also alluded to frothy inflation, with persistently high energy price inflation a big factor, despite softening goods price inflation of late.

Markets now expect one further 25bps rate hike from the RBA this year, according to a recent poll from the good people at Reuters. In other news, the latest Australian Retail Sales data beat estimates, rising by 0.4% during March, well ahead of the 0.2% gain estimated. AUD/USD has also seen a fairly solid week, fuelled by that surprising RBA decision, as well as a broadly weaker greenback. The pair has rallied by over 1%.

With a lack of keynote economic data to drive the Kiwi, NZD/USD has followed the Aussie higher (and greenback lower), pushing back over 0.6270.